Spiders

I have recently begun to diligently follow the Fool and have searched your firm's website regarding certain American Depositary Receipts known as "spyders" or "spiders." What are they?

Standard & Poor's Depositary Receipts, or "Spiders," were created by the American Stock Exchange in January 1993 as a convenient way for investors to buy and sell the aggregate stock of the companies represented in the S&P 500. The SPDR Trustee is the State Street Bank and Trust Company.

Basically, they're a way of putting excess cash to work, earning market returns.

Spiders represent a unit of ownership in the SPDR Trust, a long-term unit-investment trust that was established to accumulate and hold a portfolio of common stocks intended to track the price performance and dividend yield of the S&P 500 Composite Stock Price Index. Spiders are not an option or a future; their underlying value derives from ownership of stock, just like a mutual fund. SPDRs normally trade at a value approximately equal to 1/10th of the value of the underlying S&P 500 Index.

SPDRs trade like stock and provide quarterly cash dividend distributions based on the accumulated dividends paid by the stocks held in the SPDR Trust, less nominal Trust expenses. Essentially, Spiders are an alternative to an S&P Index Fund, such as the one offered by Vanguard.

Advantages of Spiders over an Index Fund are convenience and liquidity: you can buy or sell Spiders just like a stock, any time of day, at an established price, in any amount -- even on margin, if your account qualifies. (SPDRs also provide a convenient way to sell the S&P Index short, should one be so inclined.)

SPDRs can also offer certain tax advantages as compared with an Index Fund, because they give you control over distributions of capital gains. If you purchase Spiders through a deep discount broker, their total return is essentially indistinguishable from that of the Vanguard Index 500 Fund, an itsy-bitsy difference at most.

So why mess with Spiders? Well, it seems silly to have a pile of cash sitting around collecting dust when it could be working in an essentially sound market. You probably won't plan to keep an investment in SPDRs forever, however. If a compelling single stock purchase comes along someday and you need to raise cash, the Spiders may get exterminated -- or resettled humanely in someone else's account, I should say. On the other hand, spiders help keep the bugs in one's portfolio under control, so you should be happy to have the arachnid amigos around.